Wednesday, August 23, 2006

Bobby’s Leading Economic Indicator

The stranger rode up out of the darkness on his bicycle in the quiet of the late-evening that covered the woods in muted darkness, then reached out and held onto our horse-drawn carriage with one hand and started gabbing with the carriage-driver for the rest of the ride back to our hotel.

The bike-rider's name, it turned out, was Bobby, and he is native to this island—“born and raised here, like my parents and their parents.”

And however many statisticians the Fed has in Washington feeding those gajillions of lines of data into whatever number of computers they employ in their seemingly endless effort to figure out what is going on right in front of their faces, Bobby has them all beat: Bobby runs a chicken grill in town.

Without knowing Bobby at the time, a year ago I reported from this part of the Great Lakes (“Report from the Midwest”) on not just the rising cost of everything a businessman like Bobby needs—from the charcoal he uses to cook the food and the staff he needs to help tend the customers, to the diesel fuel that runs the ferries that delivers both his food and his customers—but also on the new-found ability of the restaurants and hotels and ferry lines to raise prices to cover those rising costs. (“They’ve all raised prices,” my report concluded. “Let the bond market beware.”)

What a difference a year makes.

Last night Bobby, the stranger on the bike, expounded in great detail on the factors affecting his very small business...and if Bobby’s business is a leading economic indicator, that indicator is slowing down pretty sharply.

Bobby’s Grill is as basic as it gets: a big charcoal cooker set up outdoors on the lawn near a church in town, with a table for fixings and chairs for the people while they eat. He gets the grill going around 9:30 in the morning, and by 11 he’s ready for the customers that line up every day for his grilled chicken.

On a normal day in a normal summer, Bobby told me he serves 50 to 75 chickens at lunch. Lately it’s down to 25. “I’m not getting the blue-collar workers,” he said. “Still get the higher income people, but not the blue-collars.”

And that’s despite cutting his price from seven bucks a meal to $6.25.

Being in the Midwest, and being a half-dozen hours north of Detroit, what we have here is the real-life impact of those GM and Ford oops-we-make-gas-guzzlers-and gas-is-$3.00-a-gallon headlines, multiplied across dozens of factories and thousands of lives dependent on those companies and their gas guzzlers for work.

(What is GM’s response to all this? Why, GM is bringing back the Camero, a gas-guzzling muscle car, of course! I am not making that up.)

Meanwhile, the Fed’s statisticians, in their infinite wisdom, will certainly ignore Bobby’s Grill as any kind of useful economic indicator for the simple fact that it is what the Fed likes to think of as a statistical aberration—part of those pesky food and energy sectors that get eliminated from the consumer price index in order to “smooth” the data into irrelevance.

But it’s not just GM and Ford that are laying off “the blue-collars,” as Bobby calls them. It’s Toll Brothers and Centex Homes, too.

And pretty soon—this is just a guess, but the food chain isn’t too hard to follow—Lowes will slow down its hiring and Home Depot will put on the brakes…and long after the bond market has begun another bull market on the anticipation of a slowdown and price deflation, one of those computers down in Washington will figure out that back in late 2006 we began to enter something called a “recession.”

But Bobby’s recession began last month.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


fgruben said...

GM bringing back the camero. there is true leadership. from the rear, backward

cdub said...

No doubt the blue-collar jobs are disappearing from that part of the country, but many of them are opening in other areas. Extrapolizing based on a limited set of data from an abnormally affected area of the country is likely to lead to incorrect conclusions.

ColumbusPM said...

You indicate that the Fed is out of touch with the weakening economy. This implies the Fed has tightened monetary policy too much and they should reverse course and ease.

On the other hand, you've indicated before, and even touched on it here, that most inflation statistics don't capture a number of price increases people are having to deal with. This would imply the Fed needs to tighten monetary policy more to reign inflation.

Which is it? Have they gone too far in tightening?

Recent Fed statements have noted they recognize the increased inflationary pressures and also the expected softening of the economy.

Still a fan...keep writing that good stuff.

Barry Ritholtz said...

All these ancdotes add up to a slowing economy . . . Even the bulls do not have counter anecdotes to tell us how greeat everything is.

Remember, the plural of anecdote is data.

fatbear said...

Unless Bobby's magical, "rode" not "road" - otherwise well to the point.

Regret said...

in your first sentence, "road" s/b "rode."

rkb said...

My neighbor is a contractor, doing mainly interior updates and remodels. We were talking a few weeks back and he was worried about his latest job. More specifically, he was worried about breaking even on it. He submitted his quote in January and by the time he was nearing completion, the increase in materials costs had eaten all of his usual 50% margin (want to use copper for that bathroom plumbing?). He can only raise his prices at the risk of losing the job. Granted he should have made a provision for the cost of materials in his contract, but he hadn't foreseen such a drastic impact. I suspect that many small businessmen are in similar situations, especially in truly discretionary fields.

Aaron Koral said...

Jeff: This morning I caught a blurb on CNBC where the yields on 2, 5, 10 and 30 year US Treasurys are all trading below the fed funds rate (I am not making this up - see the link below from Bloomberg today):

An open question for the board: why would US Treasury bond yields be trading below the fed funds rate unless there's a growing sentiment among traders that the Fed is more likely to ease than raise rates? Just wondering, and I might be mistaken...

BDG123 said...

GM NEEDS the Camaro. They need it for reasons that transcend $3 oil. But, your point is well taken and accurate. They also need to get moving on the efficiency side of the equation.

Jeff Matthews said...

ColumbusPM raises a good question--if the economy's getting weaker has the Fed gone too far tightening; and, if so, should it ease given that inflation, as I've pointed out for the last year, is higher than the Government data would have it?

I don't know--I'm not a big picture guy. But just because the economy is weakening doesn't mean inflation will slow.

After all, we had a booming economy from 2003-2004 yet retail and consumer product companies had no ability to raise prices, even though their costs were rising.

That trend has changed: they now have pricing power.

So I see no reason why we can't have a slowing economy even while companies have regained the ability to raise prices.

Clorox, for example, had negative volume growth but a 5 or 6% sales increase last quarter thanks to higher prices.

I'm just seeing, for the first time in 5 years, signs of a recession ahead. Seemed worth putting out there!

gvtucker said...

Tie this back into energy prices.

Time and time again, energy pricing has been self-correcting. Production has grown steadily for the past 20 years, the only thing determining energy pricing is demand. Demand has been above the trendline for the past 3 years, so energy prices have shot up. Contrary to popular belief, production growth is the same as always.

Now, the economy is starting to slow, in part because the price of energy is high. Demand is going to slow, and everyone will be shocked a year from now when crude is below $40/bbl. It happens every cycle.

whydibuy said...

Signs of a pending recession....Transportation index declining consistently since Apr now down about 17%, retailers getting clobbered ( HD,LOW,TGT,AAP,WMT you name it. ) And home sales throughout the country are " hitting a wall " according to housing blogs Housing Panic and Housing Bubble. And now after a quiet two years I'm noticing a slew of closings and auctions of manufacturing plants here in Mi. Recession couldn't be clearer if the fed rang a bell.

afavorsky said...

Still, Bobby's price is down from $7 to $6.25?
Doesn't this indicate - if you want to take the Bobby indicator seriously - that inflation is likely to be limited, and commodity prices head down?

Gap Trader said...

The blue collars have had it tough for a while now. From stagnating real wages, increasing debt loads, the country's general abandonment of a manufacturing economy... its all just a precursor to losing jobs. I dare say, their financial predicament is very similar to pre-1929. However, back then, manufacturing was even booming.

Jeff Matthews said...

Jack: I don't think your generic comments are backed by data.

We have record home ownership, even among "blue collars," low unemployment, and until recently, strong real wage growth.

As for "abandonment of a manufacturing economy"--well, we abandoned our agricultural economy and it wasn't a bad thing to do.

Cat and Deere and many other companies have done very well manufacturing higher value-added products and leaving the commodity stuff offshore.

Do you want to hang on to outdated jobs and try to compete with China, or do you want to move to a service and high-value-add economy, and leave the low cost production to China?

econjohn said...

do you want to move to a service and high-value-add economy

hey, jeff, high-value-add to whom? i mean, we can't all be investment bankers (or their children). then again, i guess some of us have to serve them at restaurants. now that we're all up in arms over immigrants, maybe those jobs will open up for all the ford/gm/suppliers in michigan. iirc, it's mackinac where bobby's sells his bbq, right? maybe next year's post will be about the lack of jamaican wait staff at your morning breakfast. value-added indeed.

as for jack's generic comments, nytimes backs one up just today (which granted, you did acknowledge):

"The median hourly wage for American workers has declined 2 percent since 2003"

Alex Khenkin said...

Jeff, your response to Jack above is surprising in its disingenuousness. Let's take a look:
- Jack: I don't think your generic comments are backed by data.
- Well, neither is your original post.
- We have record home ownership, even among "blue collars",[...]
- Jack just happened to have a different name for it: "increasing debt loads".
- [...]we abandoned our agricultural economy and it wasn't a bad thing to do.
- When did we do that? Tell that to your elected representative voting for farm bills. Agriculture is still a huge business in the USA, and a major source of exports, even though it does not employ too many people.
- Cat and Deere and many other companies have done very well manufacturing higher value-added products and leaving the commodity stuff offshore.
Do you want to hang on to outdated jobs and try to compete with China, or do you want to move to a service and high-value-add economy, and leave the low cost production to China?

- You may well be correct here' but how does that help your average blue-collar worker? As our productivity grows, there will be fewer and fewer manufacturing jobs available, even as the output continues to increase. Moreover, the jobs will not be your typical "blue collar" - it will be a CNC programmer in a white coat running the shop and a maintenance engineer in a white coat maintaining the machining centers. I fail to see a blue-collar worker in this scheme.
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